Compute the after-tax nominal interest rate

Reference no: EM13223026

1. Suppose technological advances cause the natural or full-employment level of real output to increase.

a. If the quantity of money and velocity are constant, what will happen to the price level? Illustrate this situation with a supply and demand for money diagram.

b. If the Fed wants to keep the price level stable, what should it do? Illustrate with another supply and demand for money diagram.

2. Let the before-tax nominal interest rate be 8 percent, and let the inflation rate be 4 percent. If the tax rate on nominal interest income is 25 percent, compute the after-tax nominal interest rate and the after-tax real interest rate.

Reference no: EM13223026

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